Banks, fintech firms need to collaborate to reach the unserved population

There is a clear need for both banks and bankers, say experts

Leading names of the fintech and payment industry, including Google Pay Managing Director (MD) and Business Head Sajith Sivanandan; PhonePe Founder and Chief Technology Officer Rahul Chari; Amazon Pay India Director Vikas Bansal; HDFC Bank Chief Information Officer, Group Head IT Ramesh Lakshminarayanan; Avanti Finance Chief Executive Officer (CEO) Rahul Gupta; and Infrasoft Technologies MD and CEO Rajesh Mirjankar joined Tamal Bandyopadhyay at the Business Standard BFSI Insight Summit in October 2021, to discuss whether fintechs have made banks obsolete. They shed light on what banks and fintechs need to do to improve the customer experience and reach the unserved population. They also discussed the importance of collaboration between banks and fintechs. Edited excerpts:

We need banks, but do we need bankers?

Chari: I have always said fintech means bringing finance (from banks) and tech (from players like us), and it’s a collaboration. Both entities in a concerted manner are going to change the landscape. Coming to bankers, the larger question is: “Is technology going to upend a lot of professionals and professions going forward?”

Why are we just talking about bankers? There are a lot of professions which, unless they evolve, are not necessarily going to stay the way they are. Adoption, appreciation and utilisation of technology in any profession is going to be the way forward. So, banks as well as bankers are going to be there. How they operate, how they adopt and embrace technology is going to decide who will survive and who is not going to survive.

Gupta: We need both banks and bankers. When we talk of giving better options to people in the choice of financial products and their delivery, banks plus fintech, payment gateways in-between, open platforms, and platforms for social good — all of this coming together will make the real game-changing moves that we want to see in the industry which benefit the end-user.

Rahul raised a very good point: why isolate financial services or banks? What’s going to come down the pipe is going to affect a lot of professions, and how people pivot and morph themselves with new skills is going to be the sort of change that we have to look at. Everybody is going to coexist, especially in a country like India where there is still a digital divide. It’s not that fintech is going to solve everything.

Mirjankar: There is a clear need for both banks and bankers. Large banks and private banks have adopted technology, so have cooperative banks, and public sector banks have got into digital.  Regulations are also coming to get them to operate in the right manner. So, much of the banking ecosystem will continue to exist. There is so much out there to sell that everyone will make money.

So, I don’t think the banking system per se will be threatened by fintech. In fact it’s going to be enabled by fintech players, and fintech as a word will evolve together with banks and non-banking players. You have to solve some of the customers’ problems, and that is where you build a business case. Whether you have a bank doing that or a fintech firm or tech firm doing that, it hardly matters. You have to solve a problem, and there are enough problems in the way financial inclusion has to be addressed, where there is enough for everyone to do. That’s why banks and bankers will continue to coexist. There is talk about AI taking away manpower from the ecosystem. I don’t think we are looking at that in the next decade to come, because AI as a system is yet to mature in terms of what it can deliver.

 

Lakshminarayanan: What is missing in fintechs companies is domain strength. You can create all kinds of models, but if the guy doesn’t understand the basic domain of finance, you can’t create magic. So, fintechs would need domain specialists, they would need bankers.

Foreign banks and private banks have invested in technology, so it’s nothing new for banks. The kind of technology that started opening up and the pace at which the banks have adopted that technology — that’s where the problem is. It’s not going to be an easy journey. The new world will be driven not so much by banks, bankers, and techies, but largely by new-age skills and how these get distributed into these ecosystems, and that balance of distribution will determine who leads the journey.

So, clearly, bankers themselves will change. Today, a CRO (chief risk officer) in a bank has to understand some of the methodologies and how they work, and a sales officer has to understand a cross-sell model and the variables going around. We will see an evolution of skills on both sides — fintech companies aspiring to pick up banking skills, and bankers wanting to take on new-age skills. And those who can create this quickly are going to lead the race. The game is going to be played on skills.

Sivanandan: What banks and bankers need to do is increase their appetite. The only way economies grow is when credit is made available. The world works on making credit available, and if credit is made available to more people, more business happens, more commerce happens. And, the one thing we need our banks and bankers to do is partner more deeply with platforms such as ourselves in order to be able to marry the data and the signals that we can bring. Just marry the signals that fintechs have with the balance sheet and licence that banks have.

To build inclusive financial and economic growth, we have to find a way in which these two things are thoughtfully married, respecting user privacy and data privacy, coming together to serve a much wider user base, with some element of risk of course, but not one that would break the bank. Banks and bankers are absolutely needed, but we need more partnerships that are deeper, that combine signals, that combine balance sheets and make a lot more available to a lot more people in order for economies and countries to grow.

Bansal: Technology has offered us enormous potential and opportunities in the banking sector, and we are seeing how India is going through massive transformation, whether that is in payments, extending to micro credit and lending, to insurance, and to wealth. What has caused this is the entry of non-banking entities, and their collaboration with banks. Think of UPI and all the other things that are happening. It’s a nice blend of tech and finance. What technology and these partnerships have also enabled is that whether it’s digital payments or micro credit, it’s no longer a tier-I city phenomenon. It has gone to every nook and corner of the country. And it is possible due to the evolution that we are seeing.

In our case, because of the reach resulting from working together, we now have digital payment penetration in every pin code in the country. That’s one part. The second is about the convenience and value proposition, because for us to succeed, it’s extremely important that the value proposition that we offer is clean, simple, and transparent to customers and small businesses. We definitely need banks and bankers, but this preconceived notion of banking needs to be changed and we need a banking sector strong in the core values of trust, safety, and facilitating a seamless customer experience.

The next decade is about instant gratification, whether it’s instant onboarding, instant payments, or instant settlements, because the next generation of consumers and small businesses just don’t have patience. These tech partnerships will also allow us to keep cost really low. And, if we keep cost low, we can offer a compelling value proposition to the ecosystem.

Is there a growing disaggregation in the banking space?

Lakshminarayanan: These are phases and the trust factor is not going anywhere. It will come back, it’s just a matter of time. Right now, it’s more about the optics of digitisation, disintermediation, and the frictionless experience. All of these are great, as this is pushing the customer in the right direction, but at the end of the day you need money that’s absolutely core to the banking industry, which is not going anywhere. But that does not mean banks can do everything. Here too, I have a slightly different view.

Banks have done a tremendous amount of technology upgrades. Whether foreign banks in the 1990s, or private sector banks in the 2000s, they have been very agile in reacting to customer needs.

As more and more banks learn how to create the new-age tech platform, they will compete very hard in each of the spaces and of course there will be partnerships. It will depend on how quickly they transform themselves and bring some of the new-age experiences to their customers.

Sivanandan: Google Pay does not accept any deposits — we are not authorised to, and we have no intention to get authorised. We are partnering with banks and that is our stated intent — to partner with the ecosystem. We have what is called a spot platform, on which any bank can tie up with and get access to the users of Google Pay. They give no money, nor park any with Google Pay. So, we marry the bank with a customer.

The industry is going through a platform evolution, wherein there’s the core stack of the banks, on top of which increasingly there is this middle layer that is coming up, where a lot of companies are specialising in APIs of all kinds. That’s the second layer, where they are abstracting away all the work that might be required for the bank to do. Then, there are players like us (Google Pay), which is like the third stack, and then there is the user-facing stack, which you could argue is actually us.

Until and unless players like us get the balance sheet, get a licence, and are allowed to do this, we will not accept a single rupee. But we certainly want to partner with banks and ask them how we can bring more of what it is that they do to more users in the right way, and make it super easy and frictionless to all these users.

 

Bansal: From a consumer standpoint, they want the best experience and the best rates. So, it’s a value proposition and they want it in a paperless fashion. Hence, it is incumbent on all of us in the industry to say how we can offer the best value proposition to customers. In that context, more competition is good because that is when you really transform yourself and the whole ecosystem. That’s why I feel the marketplace, where we are, is the right model, because it matches the customer needs to the best product, in a seamless fashion. It’s not a winner-takes-all market. It’s a marketplace where all entities come together and the best product wins.

Gupta: If you look at those who are still out of the formal financial services system in India, it’s about 100 million households, or 400-500 million people. Has innovation benefited the same group of people in tier I and tier II cities, or is it really impacting the lives of people in rural locations? For somebody who is data-dark, and has never borrowed from the formal credit system, paperless onboarding becomes a hygiene factor.

We are talking about a little disintermediation when we talk about presence-less, because a lot of players like us believe that scalability will be driven by digital platforms and not necessarily by brick and mortar, and then multiple pools of capital will go to people who need it most. So, there has to be aggregation of capital where banks with their big balance sheets partner with fintechs.

They can point out to the banks that they want to go into rural markets, but do not have the intent to build brick and mortar branches there, and organisations like us have used our own balance sheets and risk capital to prove some concepts. So, why don’t you (banks) partner with us, because then, the most affordable pools of capital can go to the people who need it the most.

Secondly, as we talk about aggregation of capital, that’s where we also talk about disaggregation of risk, because when banks say they want to go into segments where their risk appetite doesn’t allow it, then maybe that’s where we share the risk as well, because we are still learning in this journey. So, I would move away from pure disintermediation to also talking about aggregation of capital and disaggregation of risk, which allows us as an industry to cover large swathes of customers who are financially excluded from formal services.

Chari: There is a lot of overstatement in fintech and digital payments today, in terms of what they have achieved and what they necessarily will achieve in the future. There is obviously a razor and blade strategy that payment companies are probably looking to do in terms of cross-sell, but I think it would be dangerous to call it a phase. The reason for that is, I don’t think there is disintermediation happening — that’s too strong a word.

Overall, there isn’t disintermediation. There is definitely unbundling and bringing personalisation to the cross-sell, which banks so far haven’t demonstrated as being able to do very successfully. That comes down to accumulation of data. Banks have the data but are not able to leverage it cross-functionally very successfully.

 

Fintechs are trying to dissect the customer base based on data signals and requirements. In that, partnering with the banks, unbundling services to the extent that it’s personalised to the user is a collaboration that is leading to possibly higher acquisition at lower cost, and creating additional lines of revenue for the bank also, and possibly primary lines of revenue through cross-sell for fintechs.

Mirjankar: From a perspective of how banks need to structure themselves when we talk about concepts like super app, they will have to evolve into point solutions rather than super apps where you are able to have a common open banking infrastructure, a secure way of being able to reach out to your partners and customers and being able to then provide that high-end customer experience, regardless of which customer point you’re touching.

Are legacy issues keeping banks from transforming themselves? And how critical is cyber security?

Sivanandan: Trust, data security, etc., is the foundation and bedrock of any relationship. I can see why it is hard for banks to make the transformation, because it is a multi-year journey. There are a lot of players (technology, API providers) who have started to make this relatively easier than what it was five years ago.

Mirjankar: It is heritage issues rather than legacy. There is a deep need for analysis of the data that banks carry, because that would bring out different perceptions of risk and opportunity, strengths, and weaknesses of banks. It would help banks to look at how they want to take themselves to the next level, in terms of service and making themselves viable, globally.

Gupta: Moving from a large NBFC to a startup, where we decided to build our own platform, I can say that it’s the design that has given us agility. When you are designing a platform for scale, it takes time, and big upfront investment. But, it is agile, can imbibe hyperlocal nuances and collaborate with multiple players in the ecosystem.

 

Bansal: There are certain things that a fintech brings and a bank brings, so what is important is how you integrate the two in a seamless fashion to really transform the customer experience.

Chari: For banks, managing money is the primary business, and technology is a means to an end. From that perspective, banks in India have done tremendously well. Internet banking has been there forever, and mobile banking has taken off.

Lakshminarayanan: Banks missed the beat on core banking. It was fine to digitise on the front-end, but the credit and debit is going to happen on the ledger, actually. So, the challenge for banks has to be, how to move to newer sets of technology, because of the UPI explosion.